Arguably, the main benefit of blockchain technology is the removal of a centralized authority. This is particularly true in the area of financial systems and financial applications.
Other industries include healthcare, education, retail, supply chain management, and legal. All of these industries could be largely impacted by the removal of a centralized authority.
Over the past few years, corporate governance has received a great deal of attention.
Corporate Governance and Blockchain Technology
Corporate governance is the system used to control companies, corporations, and other businesses. The system consists of various rules, processes, and mechanisms established to direct and guide the company. The main goal of corporate governance is to serve the interests of the company’s shareholders, senior executives, employees, customers, suppliers, and the local community. Typically, the board of directors has the greatest influence on corporate governance.
Blockchain has the potential to radically alter the world of corporate governance by creating new types of organizations that can run autonomously. This is done without the need for a centralized authority such as a board of directors. One such example is a Decentralized Autonomous Organization (DAO).
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A centralized organization relies on a small group of people to manage and dictate the interest of the company. Essentially, each person within the group is acting as an agent for the company. Employment contracts are used to determine the relationship each person has with the company. Their rights and responsibilities are specifically defined within the contract. If the contract is not fulfilled, a court of law decides who is responsible.
In contrast to a centralized organization, a DAO is governed by computer code and programs through the use of blockchain and smart contracts. People interact with each other according to an open-source protocol.
Keeping the network safe is one of the primary objectives of the DAO. In addition to maintaining the security of the network, members are responsible for performing various tasks within the network. In exchange for these services, the DAO rewards the members with native tokens attached to the network. This type of incentive structure is much less expensive compared to the centralized organization of using a board of directors.
In addition to a reduced centralized incentive structure, DAOs create a higher level of transparency between the company and its shareholders. The interests of all shareholders are coordinated with the consensus rules attached to the native token. DAO members are rewarded with tokens when they collectively work for the common good of the shareholders.
All rules are fully available and 100% transparent based on the fact that they are written into the smart contract. This type of arrangement eliminates the need for a centralized legal contract enforced by a court of law. Instead, a DAO relies on the smart contract where an error can’t be made. Either the contract is fulfilled, and the reward is paid, or it isn’t, and the reward is withheld.
A centralized organization is based on a hierarchical structure consisting of several layers of bureaucratic coordination. This type of corporate hierarchy has been in existence for centuries. It can be extremely inefficient, wasteful, and prone to corruption.
If this type of organization is so ineffective, why does it continue to dominate the corporate landscape? Because there is no financial incentive to make any drastic changes. The participants inside the centralized organization are paid a salary to perform certain tasks. As long as they continue to work within the hierarchical structure, they will continue to receive a salary.
DAO is the Future
Even though a DAO offers a more transparent structure for shareholders. It could take several years for this type of organization to penetrate the centralized world of traditional businesses.
Centralized organizations have been the pillar of the global business community since the beginning of modern economics, dating back to the late-1700s. People’s salaries and livelihoods are attached to this centralized approach. As a general rule, people dislike major changes in their daily lives. Therefore, it’s highly unlikely that DAOs will be adopted by major corporations at any time soon.
Brief Summary of Decentralized Autonomous Organizations (DAOs)
- DAOs can operate autonomously without the need for a centralized authority.
- DAOs are governed by computer code through the use of blockchain technology.
- People interact with each other according to an open-source protocol.
- The primary objective of DAO members is to maintain the safety of the network.
- DAO members perform certain tasks in exchange for native tokens.
- DAOs have the potential to dramatically alter corporate governance.
- Corporate governance is mainly dictated by the board of directors.
- Boards of directors could be replaced by decentralized autonomous organizations.
- Compared to boards of directors, DAOs offer a higher level of transparency.
- Concerning transparency, the needs of shareholders are better represented by DAOs.
- Centralized organizations can be inefficient, prone to corruption, and wasteful.
- DAOs would be a radical shift for most centralized businesses and corporations.
- Therefore, the adoption of DAOs will take several years or longer.